Paper Addresses Why Different Accounting Standards
Apply to Government

March 23, 2006 (PLANSPONSOR.com) - The Governmental
Accounting Standards Board (GASB) has issued a white paper
addressing the reason state and local governments are held to
different accounting and financial reporting standards than
businesses.

The paper notes that governments differ from
for-profit businesses in many ways: purpose, process of
generating revenue, stakeholders, budgetary obligations,
and propensity for longevity.
For these reasons, the needs of users of financial
reports for governments differ from those of users of
financial reports of businesses.

Because governments obtain resources primarily from
the involuntary payment of taxes and taxes paid by an
individual taxpayer often bear little direct relationship
to the services received by that taxpayer, the paper
says, taxpayers collectively focus on assessing the value
received from the resources they provide to government.
“Governmental accounting and financial reporting
standards aim to address [the] need for public
accountability information by helping stakeholders assess
how public resources are acquired and used, whether
current resources were sufficient to meet current service
costs or whether some costs were shifted to future
taxpayers, and whether the government’s ability to
provide services improved or deteriorated from the
previous year,” the paper explains.

In addition, the paper points out that since
governments do not operate in a competitive marketplace,
face virtually no threat of liquidation, and do not have
equity owners, information on fair values of capital assets
is of limited value and measures of net income and earnings
per share have no meaning to users of governmental
financial reports.
While creditors of both businesses and governments
are interested in information on the ability to repay debt,
government creditors focus more on information regarding
the government’s ongoing ability to raise taxes and the
costs of activities that could compete for those resources,
rather than on information about how earnings are
generated.

Addressing the differences between governments and
businesses, “…the GASB’s financial reporting objectives
consider public accountability to be the cornerstone on
which all other financial reporting objectives should be
built,” according to the paper.
GASB standards that address the differences in
financial reporting include:

The measurement and recognition of certain
types of revenues (for example, taxes and
grants),

The view that capital assets provide services
to citizens rather than contribute to future cash
flows,

The use of fund accounting and budgetary
reporting to meet public accountability needs,

The use of accountability principles rather
than equity control to define the financial reporting
entity, and

The treatment of pensions and other
post-employment benefits (OPEB) to allocate cost of
services equitably to applicable periods.

Related to pensions and OPEB, financial reporting
standards for both governments and business enterprises are
similar in that they are based on the concept that these
benefits are deferred compensation for employee services
and should be accounted for in accrual-basis statements as
the benefits are earned, rather than when paid, the paper
said.
Both Financial Accounting Standards Board (FASB) and
GASB standards also currently include provisions for
deferral and amortization for past service costs.
Other than that, though, the measures and presentations of
these benefits for governments and private businesses are
different.

The focus of business accounting for pensions and
OPEB generally appears to be moving toward the measurement
of the fair value of pensions or OPEB assets and
liabilities, the GASB notes in its report, while the
accounting approach for governments ties the accounting
with the actuarial funding characteristics of public
pension plans.
The GASB standards for pension and OPEB accounting
allocate expenses to periods in a way that charges each
period a level percentage of payroll for normal cost. “This
method equitably spreads the burden of an ongoing benefit
program among different generations of taxpayers,” the
paper said.